Trade Slow Stochastic Right And Rip Up Other Traders

Brought into this world via George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum guide that tells us the location of the current close compared to the high/low range over a specific number of periods.

George Lane M.D. (1921 to 2004) was a Medical Doctor, securities trader, author, teacher, and technical analyst. He brought into this world and hyped the Stochastic Oscillator, which is one of the principal technical indicators used in our day amid technical analysts.

According to an interview with Lane, the Stochastic Oscillator doesn't follow price, it doesn't follow volume or whatever thing like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price. As such, the Stochastic Oscillator can be used to recognize bullish and bearish divergences to foreshadow reversals.

I choose to swing trade the Slow Stochastic because it is more smoothed out than the Fast Stochastic creating less head fakes.

The difference between Fast Stochastics and Slow Stochastics is merely a moving average. When working with the Fast Stochastics using the values of 5 and 5, the first 5 is the raw value for Stochastics, while the second 5 is a 5-period moving average of the first 5. When using Slow Stochastics, the first two 5's are the same as with the Fast Stochastics, with the third 5 being a moving average of the second 5. You are not having an LSD hallucination, that is correct, a moving average of a moving average. Don't ponder that too much.

That slows down the movement of the indicator, hence the name of Slow Stochastics. By slowing the movement of the indicator down, we will observe a smaller number of signals to buy or sell on the stock chart, although they should be more accurate signals to trade for profit.



As you can observe in the picture above, the Slow Stochastic offers fewer buy and sell signals however they are more accurate.

The settings I like to use for the Slow Stochastics depends on the market or stock I am looking at. I constantly get a giggle out of investors which attempt to use a one size fits all tactic. I say use the power of modern day computers and more superior charting tools like Market Club that provide a dynamic java interface that lets you change the settings in real time. Just grab the slider and tweak the settings so that the signals are smoothed out with less head fakes, and that fits your stock trading style (buy and hold, swing trade, day trade, etc).

In addition keep the kind of Stochastic signal you are looking to either buy or sell as fluid also. For example, you may find that the signal line breaking above the 20 line is a good buy indicator, where a good sell indicator is the signal line breaking below the %D line. You could uncover that for the stock you are trading that a cross of the signal line and the %D line is a more improved buy signal while a advantageous sell signal is when the signal line extends above 80 for a day or two and then crosses under the 80 line. You may well find that bullish divergences are better trade signals for certain stocks and markets. For instance, go long when the stock price makes a good low but the Stochastic draws a shallower low.

Remember, every stock and market has its own behavior at various times of the year since that personality is a manifestation of the collective human psychology of all the investors who are trading that specific market at a specific time of year. Learn to change your Stochastic to the market you are trading and to your own trading approach, and watch the money start to pour in.